Ricardo Hausmann on What it Takes to Win a Trade War

SPEAKER_2 (0:02)

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Joe Weisenthal (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:22)

And I'm Tracy Alloway.

Joe Weisenthal (0:24)

In this ongoing trade war, I don't know, I guess it's a trade war, all the trade headlines, I have to say one of the things I always think about is, and I write about it, and we reference it, the two of us reference it all the time, the complexity and the importance of sort of building complex things as a marker of a sort of country's capacity for wealth and the sort of complex international trade webs that undergird the production of complex things.

Tracy Alloway (0:50)

Joe, I know what you think about. It's monkeys and trees.

Joe Weisenthal (0:53)

That's what you think about. That's what you think about.

Tracy Alloway (0:55)

That's what you think about.

Joe Weisenthal (0:56)

Okay, yeah.

Tracy Alloway (0:56)

I do think about that. Okay, the reason I think about monkeys and trees is because a couple years ago, we had Ricardo Hausmann on the podcast, and he used this metaphor to describe why some countries are richer, more economically developed than others. And the metaphor was that certain products or industries are like trees in a forest and the firms are like monkeys. And so businesses kind of jump from tree to tree. And so what you find is if a country gets good at one particular product, then the business, the monkey will jump to the next tree, the next adjacent product, and use that experience to build out their offerings. And so you tend to see the more complex economies, the bigger forests, the more monkeys swinging from trees are indicative of greater advancement and more wealth.

Joe Weisenthal (1:48)

Right, and this is how you can have a country that at one point specialized in rubber becoming a major player in cell phones, or a economy that at one point made t-shirts, which require some level of coordination of supply chains from the thread and the electricity to power the looms, suddenly become much more advanced in any number of things. Anyway, I think there's a very powerful idea, but when I think about the idea that, okay, now there's this trade barrier between the US and Canada, for example, and we have these complex webs of supply chains in which goods cross the border multiple times, do we constrain our capacity to do complex things?

Tracy Alloway (2:28)

Are the monkeys going to slam headfirst into a trade wall?

Joe Weisenthal (2:32)

Yeah, it's literally it, right? Like they're swinging around and they're making these webs and densifying, and then suddenly they slam into a wall in a very real way. What does it mean for American wealth if America sort of like constrains this ecology of trade?

Tracy Alloway (2:49)

I think it's a very valid question.

Joe Weisenthal (2:51)

Well, I'm very excited. Back on the podcast, we're going to be speaking with Ricardo Hausmann, professor at the Harvard Kennedy School and the founding director of the Harvard Growth Lab. So Professor Hausmann, thank you so much for coming back on Odd Lots.

Ricardo Hausmann (3:06)

Thank you for having me. Really happy to be back.

Joe Weisenthal (3:10)

It does not seem like, if we're thinking from the complexity framework, right? If we're going to start like putting up nets, maybe it's nets, if we're going to start putting up nets in the forest, between the trees from place, it does seem harder for the monkeys to swing.

Ricardo Hausmann (3:25)

Well, the way I think about the problem is that the complexity that you were talking about in the introduction is really the amount of knowledge that you have to put together in order to be able to do things. And the question is a little bit, how mobile is that knowledge? How easy it is for you to get to that knowledge? And that knowledge takes, if you want, three forms. It takes the form of embodied knowledge and tools and material. So when you buy a cookbook, it says, if you want to make an omelet, it says, take eggs, take milk, take this, take that. It doesn't tell you how to make eggs. It doesn't tell you how to make milk. You just buy the eggs and you don't, you disregard all the technologies that go into making the chickens and to making eggs and to feeding the chickens. You disregard all of that. You just buy the eggs. And all the knowledge that was embedded in it, it's just in the eggs. So embodied knowledge is one form of knowledge and trade is one way to get it.